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Bond Report: 2- and 10-year Treasury yields fall below 3% as recession fears dominate financial markets

Bond yields softened on Thursday as a risk-off tone across global markets encouraged the buying of government debt and traders continued to assess the latest U.S. inflation reading.

What’s happening

The yield on the 2-year Treasury

slipped to 2.992% versus 3.053% Wednesday afternoon. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

fell to 3.028% versus 3.09% in the prior session.

The yield on the 30-year Treasury

eased to 3.159% from 3.212% on Wednesday.

What’s driving markets

Yields continued to fall on Thursday as economic growth concerns triggered a global risk asset selloff and encouraged investors to seek sanctuary in the safety of government bonds. Meanwhile, analysts said investors were continuing to digest the latest U.S. inflation reading.

That data showed that a key gauge of U.S. inflation rose 0.6% in May from 0.2% in April, largely due to rising costs for gas and food.

But the narrow measure of the so-called personal-consumption price index, which strips out food and energy, rose by a relatively modest 0.3% for the fourth month in a row; that was below Wall Street’s 0.4% forecast. The core rate for the 12 months that ended in May also slowed to 4.7% from 4.9% in April.

Other data released on Thursday showed consumer spending slowing sharply in May Americans turned more cautious because of inflation. Incomes rose a somewhat stronger 0.5% last month, but inflation is still rising faster than wages and leaving most Americans worse off financially.

Weekly initial jobless claims inched lower, falling 2,000 to 231,000 in the week ended June 25.

Since the start of the year, the benchmark 10-year Treasury yield is still up nearly 140 basis points, according to Dow Jones Market Data, pushed higher by the Federal Reserve hiking interest rates in response to surging inflation.

Elsewhere, German 10-year bund yields

followed the U.S. trend, dipping 14 basis points to below 1.38%, after the German unemployment rate rose to 5.3%, worse than forecast.

What analysts are saying

“Recession concerns are rising to equal status with inflation … so any headline this morning about May may require an hour or two of analysis before its impact reflects correctly in stock and bond prices,” said Jim Vogel of FHN Financial. “While the FOMC may prefer core PCE for long-term analysis and forecasting, this summer it only has one index preference — that every inflation indicator demonstrate a sustained slowdown.”

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